The Short on Short Sales: Part Two
As introduced in the last issue, my final column for the 2010 season will be a continuation on the subject of short sales. Focus there was on the selling side of the equation. Here, the buying side. But bear with me, it’s not a clear-cut process.
In case you missed it, a short sale in real estate occurs when a bank who holds the mortgage(s) on a house agrees to accept less than is owed in order to satisfy the debt owed by the homeowner. Simply put, the sale price falls short of paying off the mortgage(s) on the house.
In the midst of an ailing economy and struggling housing industry, it’s an alternative to foreclosure that usually results in a win-win-win for buyer, seller and lender. It won’t likely be a quick or stress-free transaction but, in the end, it can produce positive results.
The buyer usually gets a good deal, the seller rids himself of mortgage debt while minimizing the negative impact on his credit, and the lender mitigates its losses by keeping the debt off its books. Achieving this outcome though means understanding that the process will take much longer to reach closing than it would for a traditional home purchase (typically 3-6 months).
For buyers, the key to a successful short sale is knowing how the process works. Unfortunately, there’s no definitive procedure within the industry so it can vary from one lender to the next. By textbook standards, the short sale has three stages: application, preliminary approval and final approval.
The application is intended to initiate discussions between seller and lender and to establish a sale price that the lender is willing to accept. This stage can be lengthy and it can take up to 90 days for the homeowner to receive a preliminary approval. Some banks require a home to be listed for a specified period of 60 or 90 days before it’s allowed to be considered as a short sale.
Ideally, the seller has submitted a short sale application to the lender and has received a preliminary approval. This means the home is eligible for a short sale, but obtaining prior approval isn’t mandatory. Consequently, many sellers don’t bother to do so, list their home anyway, and then hope for an offer that’s high enough to cover what they owe, the commission, and other fees related to the sale. All too often though those offers don’t come and the one that does means a short sale is inevitable.
Arguably the most important thing a buyer in the market for a short sale can do is work with a realtor who has experience and understands this type of transaction. A knowledgeable agent will know to find out who is in title, whether a foreclosure notice has been filed, how much is owed to the lender(s), and what recent home sales have been in the area for comparable properties.
All of which is useful in advising a buyer to make an offer or not and, if so, in determining a price that’s more likely to be approved by the bank. This will not only save time, it will also protect your interests.
Buyers need to be aware that even though a seller may have verbally “accepted” your offer, it’s the lender who makes the final decision. Some lenders submit short sale offers to committee, which takes significantly longer, but most are now taking between 30 and 60 days to review all offers presented. Final approval doesn’t occur until the lender has accepted an offer and a closing date has been set.
Another caveat is that listing agents are responsible for submitting all offers presented on a property, and even in today’s market, it’s not uncommon for multiple offers to be received, even some over asking price.
While it may defy conventional wisdom, the highest offer may not necessarily make the most sense to the lender, so it’s important to be prepared when making your offer. Submitting a mortgage pre-approval letter, a list of comparable sales that support your offer price, and a copy of your earnest money deposit can make the difference between your offer being accepted or someone else’s.
Because most short sale buyers are investment-minded and in search of the best deal, many won’t hesitate to make a low-ball offer simply because the property is considered to be distressed. A buyer may like to think that simply making an offer on a short sale property means it will be accepted. This strategy can be risky, especially for pre-approved homes, because the price has already been set in agreement between lender and seller.
Among other things, the established price is based on what is owed, the seller’s financial means, and what the market is likely to support. Anything less won’t normally get you the house, simply because it’s not in the lender or seller’s best interest.
Regardless of the offer price, it should be made contingent upon the lender’s acceptance within a specified time period.
Remember, short sales aren’t necessarily short. It will likely be a long process. Keep your options open and continue to search for other properties. Emotional attachment is cautioned.
Short sales are a very different process than traditional real estate sales. They require many parties to work together in order to facilitate a successful transaction. Buyers need to be educated and guided on presenting the best offer possible that increases the likelihood of bank approval. My best advice to both buyers and sellers, know what to expect, be prepared, and above all else, be patient.
Wishing all of you a happy holiday season!
Chris can be reached at email@example.com.